What, according to Keynes, are the three motives for holding money? Explain your answer.
Or, What do you mean by Liquidity Preference Theory of Interest?
People like to hold some amount of liquid cash because liquid cash has some advantages. This desire to hold liquid cash is known as liquidity preference.
According to Keynes, people like to hold cash for three reasons or three motives namely- (a) the transaction motive, (b) the precautionary motive, and (c) the speculative motive.
(a) Transaction motive:
People like to hold some amount of money for carrying out day-to-day transactions. Generally, an individual receives income payment after a period of time. There is a lag between the two income-receiving points. But the individual has to make payments uniformly over this period of time. Receipts and payments are not always synchronized and in order to make payments the individual has to hold some amount of money. This demand for money is called transaction demand for money.
(b) Precautionary motive:
The future is uncertain and in order to meet certain contingencies, people like to hold some amount of money. Firms also hold some amount of money in order to meet future contingencies. The amount of money demanded for meeting uncertain expenditures is known as the precautionary demand for money.
(c) Speculative motive:
People like to hold some amount of money for speculative purposes. By speculation, we mean doing something with the expectation of the occurrence of some event in the future. For example, if a businessman hoards a commodity on the basis of the expectation that the price of the commodity will rise in the future, then it can be said that the businessman is engaged in speculation.
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